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Debunking the myth of corporate competence

Submitted by CW Editor on May 10, 2012 - 2:06am

Among the disservices performed by the media — and particularly the embedded reporters and editors who cover corporations — is perpetuating a myth that has become pervasive in the American (and to a large part, global) public consciousness: namely, that most corporations are efficiently managed by highly competent people making the best possible decisions on the basis of data, analysis, and professional experience.

But as is the case with most "facts" purveyed in the business media, this idea is based not so much on first-hand knowledge or observation, but rather through second-hand self-reporting from the CEOs and companies themselves, and is frequently disproven by later reports to the contrary that almost always appear long after the hagiographies have been inculcated.

Case in point: The announcement that faltering Internet pioneer Yahoo was replacing yet another CEO — this time for falsifying his academic credentials on his resume (which the company certified as true in an annual filing to the Securities and Exchange Commission) — which came just a few days after JPMorgan Chase CEO Jamie Dimon's admission that the company he runs had managed to lose at least $2 billion (which has since tripled to at least $6 billon) in an effort to "mitigate risk" in its investments (i.e., prevent it from losing money) using credit default swaps — the same volatile financial instruments that had been a key factor in the global economic collapse a few years earlier.

All of this all of this had a depressingly familiar ring to it, and echoed an article in the May 8 edition of Fortune magazine from James Bandler entitled "How Hewlett-Packard Lost Its Way", which offered yet another example of how even when the firmly embedded journalists of the business media finally bring themselves to report that the emperors of our economic aristocracy have no clothes, the myth of corporate competence and efficiency somehow always manages to resurrect itself and keep staggering on, like a hockey-masked killer in a horror movie.

Bandler's article was the product of a long-term investigation into HP's recent history, and described it as "a dysfunctional company struggling for direction after a decade of missteps and scandals ... [that] has sometimes seemed more like a tawdry reality show than one of the world's great enterprises". But despite a steady stream of media exposes that read like corporate versions of Game of Thrones, business journalists always seem to approach every story as they'd never covered managerial malfeasance before, or to connect the dots of their own reporting to form a more realistic picture of the people they imbue with such boundless and perpetual credulity.

Though it remains No. 10 on Fortune list of the top 500 U.S. corporations, with $127 billion in sales and $7 billion in earnings in 2011 , HP "is in the midst of an existential crisis", according to Bandler, who describes the company's "fractious" board of directors as "riven by feuds" and "so out of control that some directors were leaking secrets to the press while the chairman ... was hiring private investigators to obtain their phone records (and those of reporters) to uncover the perpetrators."

He clearly places the blame for this at the feet of former CEO Léo Apotheker, but from his description of Apotheker's predecessor, Wall Street darling Mark Hurd — who was himself forced out under a cloud of scandal related to his relationship with an HP marketing contractor — HP's corporate pathology was in place long before Apotheker ever got there.

Like every business reporter, Bandler feels compelled to begin by blathering the usual (and useless) metrics that supposedly indicate corporate competence and health. Five years into Hurd's reign, he writes, HP's stock price had doubled, its earnings per share had quadrupled, and it led the market in shipments of PCs, printers, and servers. But, not surprisingly, that numeric litany offers little genuine insight into the actual state of the company, which Bandler himself acknowledges when he writes that "just under the surface was a very different reality":

HP was traumatized, its employees disengaged. Internal 'voice of the company' surveys revealed that morale had cratered. ... A company hailed for its vaunted 'HP way' — which emphasized employee autonomy — had stifled creativity to the point where workers ... tuned out and pretended to be clueless when executives asked them to do something ...

HP had been operated with an eye toward the short term. Hurd emphasized financial management. Revenues grew largely because of acquisitions ... and profits multiplied mostly because of Hurd's ferocious cost-cutting and growth in the PC business. ... But as time went on it became harder to find waste, and the results became extreme. Employees practically needed an act of Congress to get approval to buy a piece of software. The headquarters of the tech company did not have Wi-Fi. ...

Decay had begun to show in some HP offices. Mice skittered in the corridors. Spiders fell from cracked ceilings. As the company cut back on trash pick-ups, detritus piled up, and in one location workers took garbage home in their cars. Upon arrival, Apotheker was informed that HP was missing 85,000 chairs. The figure was so farcical that he had to check to make sure it was right. It was. Hurd might not actually have "burned the furniture to please Wall Street," as HP chairman Ray Lane would later disparagingly put it, but the Hurd era's external success had concealed internal deterioration."[1] [Emphasis added]

Bandler also notes that, like a dictator seeking to keep his generals off balance, "Hurd had fed the rivalries of his top executives, claiming that competition and 'dynamic tension' inspired better performance. Sometimes Hurd gave multiple executives the same assignment. And everyone knew [which of their fellow executives] was in Hurd's doghouse, and pounced on them".

To make matters worse, HP's various divisions "were run as separate entities, each with its own marketing, public relations, and finance teams, and each held responsible for its own performance. There was little incentive to cooperate. It sometimes seemed as if [HP's] printer and computer teams were from separate companies. This could lead to ludicrous consequences: Some HP PCs didn't even have software that would automatically allow them to 'talk' to an HP printer."

When Hurd was finally forced to resign (for false statements in his expense accounts, relating to his interactions with the aforementioned contractor), he left behind a bitterly divided senior management that made finding a successor difficult. According to Bandler, Hurd told at least three of the internal HP candidates that they were his heir, while telling the board that none of them was ready for the position. "[T]hat left bruised feelings that would ultimately sour their relations with the next CEO", Bandler notes.

That was Apotheker, who came to HP from the German software company SAP, where he'd led a secret strategy to defeat rival Oracle by illegally downloading its software.[2] He also initiated the first global lay-offs in SAP's history, which he claimed were necessitated by the state of the world economy — and then ignored pleas from SAP's customers to rescind price increases for the same reason. SAP's board eventually fired him in an effort to repair the company's relationships with its key customers.

Soon after arriving at HP, Apotheker decided the company should sell off its personal computer (PC) division, which at the time was the core of its profits, and focus instead on software. But as he maneuvered to install his supporters on HP's board, the company experienced a series of bad quarters, and negative projections began to leak to the media from disgruntled boardmembers, which in turn led to clandestine efforts to identify the source(s) of the leaks.

Bandler describes the process for deciding what to do about HP's PC division as a textbook example of "everything wrong with HP in general, and the Apotheker regime in particular. It was rushed and cursory, first dramatically conclusive — and then uncertain." A board committee set up to study HP's options held only two meetings, and didn't even consult the head of the PC division, because they were afraid he'd leak the news of their deliberations. But the CFO and general counsel worried that the lack of due diligence could expose HP to shareholder litigation if its final decision didn't work out.

So HP announced that it was simply considering getting out of the PC business, while also acquiring an expensive software company (for which it over-paid and later claimed it was swindled) and ending its foray into tablet computers (which proved an unmitigated disaster). "The reaction was dire", Bandler says. "Customers, investors, employees, and the financial press were all aghast. HP, it seemed, had gone mad. Shares plunged 20% the following day." HP announced Apotheker's firing without even informing him first, and subsequently explained that he'd "lost the confidence of the board and his top lieutenants."

He was replaced by former eBay CEO and failed California gubernatorial candidate Meg Whitman (who's had her own brushes with corporate crime), who quickly announced that HP would keep its PC division (and had the imposing fence topped with barbed wire around the executive parking lot torn out.) "Meanwhile HP's revenues, margins, and cash position continue to deteriorate", Bandler notes, and "... [i]n coming months, tens of thousands of employees are expected to be laid off".

Watching these kinds of sagas unfold every day in corporate America — or, as is usually the case, learning about them in journalistic post-mortems after they finally spill out into the public arena — it's difficult to escape the conclusion that a lot of big-name companies such as HP, JPMorgan Chase, Yahoo, and other members of the "Fortune 500" are run by over-paid hacks, with little or no meaningful oversight from hand-picked boards of equally craven, venal, and incompetent stooges, rather than by the highly capable "masters of the universe" that they're always portrayed as at the outset.

[1] That sentence alone makes the case for why all business reporters should be more skeptical of the companies they cover, but instead, they almost always give them the benefit of the doubt until a cataclysmic event reveals the underlying truth.

This kind of "stenographic journalism" — wherein reporters simply report what is told to them without questioning or verifying it — led to media recriminations in the aftermath of the 2003 U.S. invasion of Iraq, yet is part and parcel of daily business coverage in the U.S. and other corporate-dominated countries.

[2] Oracle sued SAP in response, and won a $1.3 billion judgement, which was later reduced to $272 million. Interestingly, after Hurd was fired from HP, he was quickly hired by Oracle, whose insufferably smug billionaire CEO Larry Ellison denounced HP's firing of Hurd in the first place. (Ellison, the eighth richest person in the world, later demanded — and astonishingly received — tax breaks from the city of San Francisco to hold a yacht race there.)